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Spanish, Italian bond yields rise amid eurozone concerns

Italian and Spanish government bond yields continued to rise on Tuesday while European stocks edged higher in turbulent trading amid growing concerns over the eurozone debt crisis.

REUTERS - European shares and the euro edged higher in choppy trading on Tuesday as reports of official preparations for a possible Greek exit from the euro zone and rising scepticism over the Spanish bank bailout plan limited demand for riskier assets.

U.S. stock markets were also poised for a recovery from the sharp falls posted on Monday.

However, gains are being held in check by worries that the 100 billion euros ($125 billion) lent to Spain will worsen the country’s debt problems, and as attention turns to the state of Italy’s finances and a June 17 election in Greece that could determine the fate of the common currency bloc.

“Spain’s problems are not fully solved, and there are concerns of contagion to Italy. And then we have got the wild card of the Greek elections,” said Darren Sinden, senior sales trader at Silverwind Securities.

Investors were closely watching Italian and Spanish government bond yields, which have been rising in part on concerns that the funding of the bailout puts the holders of existing government debt further down the queue for repayment.

Italy’s equivalent yields rose 6 basis points to 6.1 percent ahead of an auction of fresh debt on Thursday, when the Treasury may have to pay dearly to sell its debt.

“We’re looking at a major problem possibly for Italy, with its bond yields climbing above 6 percent for the first time in quite a long period of time,” said Brenda Kelly, senior market strategist at CMC Markets in London.

“It being the third largest economy (in Europe), it does actually set the scene that the contagion effect can’t necessarily be contained to Spain,” she said.

Concerns that the Greek election on June 17 would return parties opposed to its current bailout plan and force a disorderly exit from the euro zone were rekindled by a report that EU officials were considering ways to manage the fallout.

European finance officials told Reuters they had discussed ideas such as limiting ATM withdrawals and imposing tougher border checks on Greece as part of contingency planning for a worst-case scenario.

Price moves limited

The weekend rescue for Spain’s banks, which followed bailouts for Greece, Ireland and Portugal, sent riskier asset prices on a roller-coaster ride on Monday, and most spent Tuesday recovering much of the previous day’s losses.

The euro was just 0.2 percent higher at $1.2505, while Brent crude oil traded just below $98 a barrel and gold edged down to $1,591 an ounce.

“The ‘risk on’ trade is over as investors look to the Greek elections and Italy,” said Jeff Sica, president of SICA Wealth Management.

MSCI’s world equity index was also little changed at 299.70 after ending 0.2 percent lower on Monday, though a weak session in Asia earlier helped send MSCI’s Emerging Markets Index down 0.5 percent to 910.46.

The FTSEurofirst 300 index of top European shares was up 0.5 percent at 987.89 points after crossing into negative territory several times. The index had hit its highest level since mid-May on Monday on the bailout news from Spain.

While the Euro STOXX 50 volatility index, Europe’s main gauge of anxiety, known as the VSTOXX, dropped 1.2 percent to 32.37 on Monday, in the wake of Spain’s bank aid deal.

Growth concerns

The growing impact of the euro zone crisis on the economic outlook was underlined by data showing a surprise fall in British manufacturing output in April.

“The manufacturing figures are very disappointing and highlight the pressure the sector’s under, given the gravity of the debt crisis in the euro area, but also the lack of confidence at home,” said Philip Shaw, Chief Economist at Investec.

Britain slipped back into recession around the turn of the year as the euro zone crisis hit exports and made its companies reluctant to invest and hire.

Manufacturing output fell 0.7 percent in April after a 0.9 percent rise in March, and against forecasts for an unchanged reading.

Global growth concerns also pushed Brent crude oil prices down 0.5 percent to $97.44 a barrel. U.S. oil was down 52 cents at $82.18 a barrel after hitting a one-year low at $81.07.

“Europe is significantly affecting the growth outlook and, given China is already weak, further deterioration in the Eurozone crisis could tip the global economy into a recession,” said Guy Wolf, macro strategist at Marex Spectron.

Gold eased below $1,600 an ounce as hopes faded that the worsening economic outlook would prompt more easing measures from the U.S. Federal Reserve at its meeting next week.

Commodities such as precious metals are also being affected by investors pulling money out of the listed funds (ETPs) that invest in them.

Data from asset manager BlackRock showed investors had withdrawn some $2.9 billion from U.S. and Europe-listed commodity ETPs last month, after withdrawing nearly $1 billion in April. About $1.5 billion of the May outflows came from precious metals ETPs.